Howling At the Moon And PE Price Discussions



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By John Richardson


CHINA’S surprise decision earlier this week to raise interest rates – the first rate rises since December 2007 – has badly dented sentiment in the polyethylene (PE) market, said a source with a Western producer.

But estimates of price direction based on this sentiment were mainly notional as nearly all business had been concluded for October, he added.

Discussions for November are only expected to begin next week.

“It is scary out there as sentiment has weakened quite dramatically, but my boss has told me to sit on my hands, to not panic, and do nothing until things settle down,” the source told us.

The very fact that he is suffering from the cold sweats over a macro-economic decision, the implications of which will remain unclear for PE for some time, is an indication of how much the market has changed since January last year.

As we have argued on this blog many times before, PE in China has essentially become another financial instrument thanks to the Dalian Commodity Exchange.

And sure enough, when China’s rate-rise decision was announced, linear-low density PE (LLDPE) futures pricing declined with monthly contracts falling by as much as 4% in one day – the maximum allowed under the exchange’s rules, said a Singapore-based polyolefin trader.

“Pricing for the biggest-volume contract and so the most-watched at the moment – the one that matures in January – has since recovered a bit. I have no idea why,” he added.

The trader and the source from the Western producer agreed that Dalian was an important reference and influence.

“It follows equities and crude as they respond to the big economic news,” added the source.

In the 13 years the author of this post has been covering polyolefin markets in China, speculation has always played an important role. But now it seems as if it has taken centre stage.

As we have already said, to some extent we are in a hiatus right now – between the end of October business and the start of November – and so the lack of clarity makes falling back on the macro stuff for direction very tempting indeed.

“The market was great on October 8 and 9 after the Chinese October holidays, pushing pricing up very quickly. Since then it’s been quiet so talking about transaction levels at the moment is a little academic,” the trader added.

But on many occasions over the past 22 months sentiment has been dominant when transparent conditions in the actual PE market were pointing in the opposite direction. For example, imports surged in March this year when it was obvious that Sinopec was ramping-up production. The end-result was overstocking and the weak pricing we saw in April-June.

If everyone switched off their Blackberries and I-Phones and took a deep breath, the world might be a better place.

But, of course, no producer or buyer can afford to do that because of the baleful influence of the Chinese trading and distributor community that has swelled in size thanks to all the stimulus money that has made it so easy to gamble.

The addictive, high-speed flow of information and disinformation via all the Blackberries and I-Phones makes sober and rational pricing discussions a distant and hopeless dream.

A source with a second producer told the blog over lunch yesterday (can a blog eat lunch?): “We don’t even bother to explain to converters these days why prices are being increased because it only ends up in a pointless argument. You might as well howl at the moon.”

“They know, and we know, that the market rarely makes sense these days thanks to the increase in speculation.”

We will – in a subsequent post over the next few days using our imperfect information – attempt to tell a story based on the fundamentals about what the rest of this year should look like.

This is probably a total waste of time.

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